This COVID pandemic made me realize how fragile being employed is for our OFWs. It doesn’t matter if you’re an OFW working in a far away land in exchange of a better pay, or an ordinary salary man in your own country. Employment is as fragile and as risky as being in business. If not, much more riskier than being a business owner. For a business owner or investor can create mutiple sources of income, an OFW and the employed only have one.
What pains me the most are OFWs who have nothing to fall back on. No savings, no investments, only regrets. After working decades in a far away land and away from their growing children, they became a burden as soon as a crisis such as the COVID pandemic hits. Out of jobs and depending on the people who used to depend on them.
If there is one thing I know that could help people is knowledge. If you know how to fish kind of thing. As most OFWs don’t even think about investing most of their life and only tries to think about it come retirement, failing to realize that a comfortable and happy retirement takes a lot of years in preparation. I hope that I could convince some of our OFWs to prepare. To live a happy life with their families and not depending on going abroad.
This is not an impossible feat. You don’t need to be the next Henry Sy to retire early or to quit being an OFW “for good”. You just need to have enough that could sustain your lifestyle without depriving yourself. And for most people, its just a small sum. You can buy your freedom then.
Though I already said that the main motivation of making this guide is for OFW, everyone who can understand English would be able to make the most out of this guide. But the setting would be in the Philippines so adjust accordingly. This is mostly a beginners guide, in order to prepare you to more advanced topics. Once you finish reading this guide, you will be able to fully understand all the investing books that seems so hard to understand.
What is Investing?
Investing is putting off the use of money now, so you can have more of it later. It just means that with the money you have now on your hands, you will put it in some place safe, and in the future, when you take it back, it has already grown. This is the simplest definition I can come up with. Not using money now, so you can have more of it later. I’m sure that with this statement, there are already some alarm bells firing in your head. So let me address that now.
What? I can’t use my money?
I’m sure you heard of this before “I deserve it.” So you splurge and splurge until none left. “Hindi mo madadala ang pera mo sa hukay.” So you spend it all without regard for tomorrow. All these cliches are good to follow. You won’t be able to take the money with you in the after-life, that’s true, but only if you expect to live a short life. To believe it to the point of fanaticism is not the point of this guide. And I’m almost sure that anyone would want to live a long life without the financial stress and not depending on their kids for their retirement. We should strive for balance.
We should save money and spend money all at the same time. But not going for broke everytime you spend. For saving money will prepare us for the future, if we so happen to live a long life. And if our family, who depends on us, lives a long life… And also to spend the money as you grow old so you never miss the spices and enjoyments of life. All of it is in balance and it depends on you how you will approach this.
I spent almost all of my youth as a “Spartan”. A word I came up with to express how much hardship I put myself into so that I could save money. Money used for investing. It’s not for everybody, but I never regretted it. It took me to where I am. And I’m sure many people would never be able to do it. They have reasons, family, friends or lack of self-discipline and there’s nothing wrong with that. We should work with what we have. But we should also strive to better ourselves.
On the other extreme
On the other extreme are people who never spend money. It will be easier for them to get rich but it would be hard for them to let it go. And they are the people who “never enjoyed their money”. There are people like that, that we don’t want to end up with. Strive for balance.
Know your FU Money
There should come a time when you already have enough money. The kind of FU money where you can quit and do anything you want. I talked about FU Money on this video:
How to Get Your FU Money
Arrive at an amount of savings in which when you put it in a safe, risk free investment, would be enough for you to live of just with the interest alone. If you are able to live of 20,000 per month, and the risk free investment that you can find is 6%, the amount of FU money that you need so you can call it quits is 4,000,000.
Now that you have a number, you have a goal. And if you go straight at achieving that goal no matter what, things will become much easier.
How many OFWs among you can save that money in just a few short years? Most of you can. But not most of you can call it quits. You can’t stop. Trapped in the perpetual cycle of working. Why is that? Because you didn’t know how to get out. You don’t know how to make money work for you. You lack knowledge. So we continue on with our journey.
By the way, I talked about FU Money in detail and how to compute and achieve it as part of my VIP course right here: FU Money: A Guide to Financial Freedom.
Saving is All Good, But You Need to Invest
A young man asked a rich old man, “how to get rich?”. And the rich man answered, “Well, can you save?”
Money grows on trees and these money trees need seeds. Saving is what allows you to accumulate seeds. But saving seeds is not enough. Saving for savings sake is not enough, you need to invest. Why? Because inflation. While you break your back working at a day job, the money you save gets eaten by inflation. You need someone or something that will help you increase your income, your cashflow. Right now, just by saving, your source of income is only one (1). And no matter how good you are at your job, you will grow old, and get tired, and sooner or later, you can never work as you used to when you were young.
You need to start thinking about creating a new source of income using the money that you save now. Because idle money is bad. And many sources of income is good.
How to Create a New Source of Income?
There are 2 ways to create a new source of income:
This is where you will have to find your strengths and know your character and situation. If you’re occupied by a day job, perhaps you won’t be able to start a new business because of the lack of time. But you can do investing. There are people who start a business part time and end up going full time with it when it becomes successful.
But since we are in an investing blog, I will only talk to you about investing.
Back to Investing
So we run full circle and end up where we started. What is investing you say? I’m sure you can answer that now… Investing is putting off the use of money now, so you can put it in a safe place, and when you get back to it in the future, you have more of it. In other words, delayed gratification.
Pay close attention to the words I highlighted in bold.
Putting off the Use of Money Now = Saving money
Put in a Safe Place = Investing knowledge
In the future = Long Term Thinking
Delayed Gratification = Patience
If you read that again, I just describe to you what you need to get started investing.
Requirements for Investing
- You need the money through saving.
- You need investing knowledge to know where is the safest place to put your money wherein it would grow.
- You need long term thinking so the fluctuations of prices will not deter you from your plan.
- You need patience to just let it sit there and compound for many many years.
- and a PH broker account or a US/International broker.
If you don’t have money, go find a job. Do some side hustles. Eat only talong and itlog. Whatever you can do to get that money.
If you don’t have investing knowledge, you should seek it. Read investing books, take courses, find a mentor. If you can teach yourself investing through google without spending money on books and courses, remember that “a person without a mentor, have himself as the dumb teacher.”
There are lots of people more intelligent that us in this world. Both living and dead. If you’re going to go through life, trying to experience what they experienced, doing it all by yourself, you are wasting your time. You’re smarter than that. Spend money on education, you’ll be spending money on investing anyway and knowledge is investing in yourself. I am not saying this just because I am selling a course on investing. I am telling you this as an investor. Knowing where to best put your money is what I do for a living. And if you’re going to ask for my advice, if you’re at the start of your journey, the best place to put it (or to invest it) is in your own education. Can you believe that people will spend money on a lot of things, tools for the artisans, gadgets for school, but not a lot of people would buy books and courses for their brain. While the brain is your most important tool in investing. Fill it out with books and courses now.
I’m not saying to avoid learning by yourself, and I’m also not saying that you should go learn all by yourself and not to find a mentor. Like everything in life, you need to have balance. Dismissing people with genuine experience because they “look and sounds” like a scammer is a prejudice in itself and may hinder you from improving yourself as an investor. So strive for balance.
I remember vividly like it was yesterday, the first books that I have read. Rich dad, poor dad, The Richest Man in Babylon and Think and Grow Rich. Having no money, spending on these books sounds like a bad idea as I can always learn by myself for free. And besides, the authors are rumored to be scammy and con men, especially Robert Kiyosaki and Napoleon Hill. But the money spent on those books altered the course of my life and returned to me a million times. Its those 3 books that paved the way for me to buy more books, without the initial investment, I wouldn’t have learned investing, I wouldn’t have bought stocks and I wouldn’t have retired early.
You are buying someone else’s life experience inside a book or inside a course. If you pick your authors and mentors well, you have a very good investment that would return to you a million fold.
From that point on, I have always spent money on books and courses. If I would even have to pick, a budget on books/courses or food? I would pick knowledge.
If I haven’t spent money on those books, I probably still am an employee and just now started to realize about the nature of stocks and probably into trading using charts. If I still got the habit of not spending money on knowledge, I would have to spend money on it either way by making mistakes. What a big difference that might have made.
Investors Should Avoid
“Tell me where I’m going to die, so I’ll never go there.” – A wise man
Before we delve deeper into investing. Let’s go to the place where you’ll die as an investor.
Investing vs Speculating (Trading with Charts)
More commonly known as trading.
I have always bashed traders in this blog. And it’s probably a bad thing. Because through their ignorance, they interchange investing and trading, so newbies like you who will come across such “interchange of words” would think that if you buy stocks, you are automatically investing.
Speculating or Trading is buying something now, hoping to sell it at a higher price later. That “later” could mean 5 minutes later. Buy low, sell high. It’s their aim, though it seldom happens. Because of their “system” of cutloss (buy high, sell low) and take profit, they will always lose money. The only way a trader will make money is through trading courses and seminars. That’s why you should be careful.
In my not too long years of investing, I have never met a rich trader. Have you looked at the list of billionaires in any country? Have you seen a trader there? What are the odds right? Oh you found one? Is he using charts? Probably not. Because successful traders don’t use charts. They use fundamentals.
What about Jim Simmons?
Good point. Jim Simmons is a trader. A very successful at that. He’s also a mathematician. But does he use charts? No. So is Nassim Taleb. And I admire them both. I admire them so much I read their books. But they are not the same traders that you see on investagrams or your guru’s trading seminar. Jim and Nassim is a real trader. In a sense that they don’t use charts. They use fundamentals. Which is the basis of everything if you want to play this game for the long haul.
If you want to become a real trader like them, drop the charts. Start reading like an investor and you’ll become a real trader. Charts, graphs and your support and resistance will not help you. Throw it away and avoid people who talks about it.
I’m not trying to discourage anyone from trading. But if you’re still insistent or if you got offended by that, you can stop reading now because this whole guide will just be a total waste of time for you..
Why are there more traders?
Easy to get started.
You don’t need to read any books. You only need to know the charts and what they mean. Totally beginner friendly. But most importantly, its big money for brokers.
Brokers make money from traders not investors.
Investors buy and hold for the long term, even forever. Brokers won’t make money on that, they need transactions. Traders transact every minute, second, hours and brokers get paid on their buying and selling. So of course, they will most likely improve their bottom-line if they convert every Filipino who wants to “invest” in the stock market into a trader. Interchanging the word investing to trading. Here is where most people get duped.
I have talked about this in detail in my post: The Stock Market is Not Meant for Investors.
Those who can, do. Those who can’t, teach.
Most trading mentors are failed traders trying to recoup what they lost in the market from the gullible newbies entering the stock market.
Hype groups are another thing you should avoid. These are websites, forums and groups that at first is a place where you could all learn how to invest or how to trade. But later, becomes a place where people promote stocks so you could buy and they can sell. You become a tool for their pump and dump. A tool for manipulating the price of stocks. The more members join the hype group lead by the guru, the more ammunition they have to manipulate stocks and the guru making money on the newbies who follow their “FREE” advice.
If you’re an investor, avoid groups like those. Especially groups that feels like everybody knows everything. If its a group about technical analysis, trading or charts, avoid that too.
I would be particularly careful about the group that members seems to know everything and where there are a lot of newbies.
Do find a group where you can discuss the business. Where there is no hype. A group in which they are hesitant to talk about stocks. This is a sign of an intelligent group of people. If people are hesitant to talk about a certain stock, it means they understand psychology and conflict of interest. Its ok to talk about a stock after you have sold them. That way, you will never be blamed for hyping and you are free from psychological biases.
Finally, find a group where the people in that group are your peers. Not newbies and lurkers trying to get information from you for free. When you find yourself in that group, leave. I can’t remember how many times I’ve done this, and they think I rage quit and stormed out. Far from it. When I realize something is not right, I immediately leave. I know its hard to find a good group, so why waste time? So I just leave immediately.
It will be a hard search for a group where everyone is your peers, but it doesn’t have to be a large group. If you can find 1 person who is your peer, it is enough.
Avoid Gurus without Skin In The Game
So you decide to find a mentor for investing. And you decided that instead of books, you want to learn under a mentor. So you search for a mentor and you find lots of it in this industry. Because there’s a lot of gullible new comers like you who wants to get rich quickly, lured by easy money, gurus sprout left and right to offer seminars and courses.
I’m not saying all of them are fraud. Most of them are fraud. As there is in any industry with a lot of money involved. But there are people who are genuinely knowledgeable about investing and they get buried among those crappy group of people.
So how do you know if someone is a fraud or not?
SKIN IN THE GAME
Its a concept by Mr. Nassim Taleb. Skin in the game means, the person who makes decision or a recommendation, does it also for himself. They practice what they preach.
In ancient times, the engineers of the Roman Empire will stand under their construction while removing the scaffold. By doing so, if the building or structure should crumble, they will die with it. And because of this, Roman structures have stood the test of time. The engineers have skin in the game. They will never create something that would kill them.
Let me give you an example in a real life context. A stock guru who is also a religious leader recommends his members to buy a stock. How would you know if this guru is a fraud or not? Skin in the game. Is he risking his neck (his own money) on his own recommendation? Meaning, if that stock went -90%, will he also lose -90%? If the answer is no. Which we all know who we are talking about here, we’re all adults, then that guru is a fraud. You can find all other examples if you look around. Especially those who recommends stocks as easily as if he’s recommending what food you should get for lunch.
This is the reason when people approached me about doing a subscription (Wayne’s Portfolio) where people can see a list of my stock recommendations doing value investing, I hesitated a bit. Investing involves risk and things may not go as planned. Things can go -50% so fast and not everybody is fit to become an investor. So I decided to put my neck into this subscription, recommending only stocks that I have personally in my portfolio, which I have substantial amount of money invested. If the stock went -90%, I will also get -90% and I’m back to the poor house. Skin in the game.
Avoid Professional Gurus on Youtube
Professional gurus on youtube make videos for the views and marketing of their seminar, books and courses. They will talk about the hottest stock so they get into the trending list. They make money from views, books and courses, and not very much on the investing or trading, though many would claim that they do. Its very noticeable when a guru on youtube changes strategy depending on which is doing good at the moment. If the basura stocks are flying high, he will teach trading, when the market is down, he teaches investing and dividend investing. Its all about what’s trending in the moment. They are like the little Jim Cramer of America. Flavor of the month. And US investors, at least the people I admire, don’t watch Jim Cramer. So why should we watch the Filipino version of it?
The reason is psychological. What you hear and read, sticks in your head. Even if the information is garbage. I talked about this in this post: Too Much Information is Bad For Investing.
Avoid professional gurus on youtube because its more on entertainment than anything. It makes you think that you are bettering yourself. But its not. Though there are some gems in youtube like the Berkshire meetings. Later, I will tell you what you should be spending your time on as an investor.
What Investors Should Do
Now that we have the list of things “to avoid” out of the way, let’s go back to the requirements of an investor. What are the things that we should do to become an investor.
You’re an investor. You get paid when the money you invested proves to be good. An investor without money is like a soldier without a weapon. You need to find it and you should treasure it. Do whatever it takes to get your hands on that money. Save, side hustles, over-time, 2 jobs. Whatever. You need to put in the sweat to save a certain amount of money where the compounding would help you build more passive income in the future.
Since money is an investor’s weapon, you should respect it as much as a soldier respect his. But never mistake it for your master. We will talk about this later.
So how much is certain amount?
In the road to riches, the first few million is the hardest. This is true. That’s why, the hardest work you will do is in the beginning, while you build that cash. So how much money do you need to start investing?
Charlie Munger said that the first $100K is a b*tch. So aim to get that amount of money as soon as possible by cutting down your expenses and live like a Spartan.
Once you have $100k (~5M pesos), you can go easy a little bit on the Spartan spirit but still continue to save and invest.
You can start today actually, any amount, no matter how little. Or you can save it in a bank account, wait for it to get big, and while you wait, you learn about investing. So when the time comes that its big enough to matter, you can invest it properly.
What I would like to do is start today. The reason is compounding.
Compounding is one of the greatest force in the universe. Human beings can’t comprehend it as easily as that of a linear movement. So most people don’t understand it. Some people think that compounding is just adding and saving money.
Compounding is like rolling a snowball. Its small in the beginning and it seems like forever to get traction, but once it gets to a certain size, you will feel that you don’t have to do anything anymore, it will just get bigger and bigger.
The three elements of compounding are:
- Amount of money
Time is the amount of time that money compounds. This is also what you mean when you hear in the bank saying “1% per annum”. It means that it takes 1 year (annum) to get 1%. Time is the most important factor in investing. So if you’re young, being invested early will sometime means the difference of being a millionaire and a billionaire. If you started early, like say, 18 years old and even if the money you invested is just 5,000. You have a bigger advantage than someone who is 36 who invested 20,000 even if the amount is 4 times as big. Remember that time is the most important.
Which goes without saying that, the best time to invest is 10 years ago, the 2nd best time is now. Do not delay investing. Start as soon as you realize it.
Some people are not aware about investing knowledge so they just go through life without a care in the world. Until they get old and weak and they can’t work the same job they used to do when they were young. Be grateful that you stumble upon this knowledge and the next best decision you can make is to start investing today.
How much your money will grow each time it compounds. Most bonds give 3 to 4%. It means your money will grow by 3 to 5% each time it compounds, most of the time, its per year. Of course, the higher interest you get, the better for you.
But this is where people fall for scams. There are a lot of people out there who are smart enough to take advantage of people’s greed. An emotion that you should be able to master as an investor and not fall victim to.
Greed makes us chase yields, higher interest rates and makes us victims to scams. Keep in mind that the best investor in the world managed to get 30% per year. If you are getting 30% per month, there’s something fishy about it. Great investors are already considered great, if they managed to get 12% per year. Because 12% is already a big interest. It can make you rich if you leave it compounding for many many years, again Time.
So aim to reach a reasonable return on your investment. Lower your expectations so you don’t get enticed to invest in high interest investment scams. I always lower my expectations when it comes to these things. I only want to beat inflation. A few points above inflation is already enough for me. If we get higher than that (which we could if we do value investing), then we are all the more happy, we are not complaining.
The Amount Of Money
Lastly, the amount of money you should invest. Like I said, you need money. But it doesn’t matter how much as long as you start investing. There is a reason why this is at the bottom of the list. Once you got money, invest it, and leave the rest to nature to take its course. Aim to save $100k as Charlie Munger said. But if you can’t, you can invest any amount until you reach it, and only until then can you relax on being a Spartan.
Where to Invest
Our next topic is where to invest. I know that there are thousands of investment vehicles on the planet and I won’t be covering all of them in this post. Part of the reason is because I don’t claim to know all of them and another part is because most of them are just derivatives of the others. What I can only share to you are the investment vehicles that I invest in myself (again, skin in the game). There are three (3). If you focus on each one or all of them, it can make you rich.
- Stocks / Businesses
- Real Estate
Value Investing works because you can navigate different investment vehicles and the principle is still the same. You have a strategy that can work on any kind of investments.
Stocks are the same as businesses, if you can’t start your own business, buy one. This is the main idea behind investing in stocks. Just think of yourself as a businessman that don’t have enough time on their hands and you just decided to give your money to someone who will execute the business for you. You still own the business (part of it), but someone has the control over what will be done with the business.
This is what investing in stocks is all about. You hand over the control to a CEO while you just put in the money. The only drawback is you might not like it if you are a control freak. Which would lead me to the 2nd type of investment.
How do you make money with stocks?
You make money in two ways:
- Capital gains
When a stock goes up in price after you bought them, then you have capital gains, by the amount that it grew. If you bought a stock at 10 pesos and it goes up to 20 pesos, you just made 10 peso profit. This is capital gains.
Another way to earn money is through dividends. This is excess income from the company that they distribute to its shareholders. Since you own a stock, you are a shareholder, therefore is entitled to the distribution of profits in equal proportion to the amount of shares you hold. If you have 1000 shares of a company and it gives out 0.2 pesos per share in dividends, you will receive 1000 x 0.2 = 200 pesos in dividends.
If you’re a control freak, you can start your own business or start investing in real estate. Some people can’t get over the fact that they will have to hand over control of their investment. If you are this type of person, then investing in real estate might be better for you. You will do everything in real estate. From finding a good investment, to fixing it up and making improvements, to finding tenants, managing tenants, collecting rents, fixing what tenants broke, and evicting tenants who doesn’t pay.
I’m not saying one is better than the other. Just pick the kind of investment that is right for your personality.
In my opinion, the only way you would want to invest in real estate is if you have a rental yield that is higher than any dividend yield you can find on a stock. So much so that the excess is enough to compensate for the work needed to manage the real estate. For example if you found a real estate deal that has 12% rental yield, while the only available stocks at the moment is at 3% dividend yield, I would only pick this real estate investment if there’s this wide a gap in the difference. Other than that, the effort and work needed for real estate is not worth it for me. But it may also vary for each person. I’m not saying that you should also do the same, its just how I think about real estate vs stocks.
If you need a house for your family, by all means, buy a house.
Bonds are loans to other parties. These parties can be businesses or the government. The safest bonds are those offered by governments, but they have lower yields (or interest). The riskier ones are those offered by businesses which have higher yields. So pick whichever is the one you like or combine them to have both safe and security and higher average yields.
Are just like bonds. This is an investment that I just took seriously just recently while having to pursue investing in private equity. I realized that small businesses have a lot of benefit in our country and a lot of them can not get loans from the bank. The business that I took an investment in private equity is one such business. I wanted to help them and profit at the same time. In short, you lend money to businesses and they will pay you monthly interest for the money they borrowed. And that is usually hard to do on your own, like create a contract and whatnot. But today its easier because of crowdfunding.
Just recently I started investing in SeedIn, because of my personal experience in lending money, I know that its like a gamble to get your money back. But SeedIn, for as long as I have been with them, nobody defaults yet on my loans. Zero defaults. I always get paid interest monthly. I am pleasantly surprised at how good SeedIn at filtering out businesses to access their platform. And I suggest you give them a try. Interest income are paid monthly. You can read my SeedIn review.
So together, government bonds, corporate bonds and business loan, you can have interest income from January to December and you don’t have to do anything.
What Investment to Focus on?
Now that you know there are 3 main types of investments that you could do, I will give you a suggestion on what to focus on first. This is not an investment advice, you are still the one if you decide to follow this suggestion.
Just like what I wrote about in my article entitled “The Only Passive Income to Focus On and How to Manage a Portfolio”, If I may suggest that you focus all your energy into investing into dividend producing stocks. The reason is threefold.
- It provides passive income from dividends
- It provides passive income from capital gains
- If done right, dividends and capital gains grow as time passes
You have 3 forces working for you if you invest in dividend paying stocks, dividends, capital gains and growth. These forces allows you to compound better than any other investment vehicles. Trust me, I’ve been there. I used to be a broke, fresh out of college person in my 20’s and I was able to quit my job before the age of 30 just because of a few good investments held for the long term. And this knowledge will also help you achieve the same thing, if your goal is to retire early and become financially free.
The Impact of Dividends to Investment Returns
If you trade and focus on the capital gains to make money, you are playing a dangerous game of zero sum. And its a much stressful business. I would rather get paid to wait than to buy in and out of stocks. It would be a more productive use of my time to let the business compound on its own and spend my free time doing other things. This is my personal opinion and preference. Would you rather like to be in front of a computer trading all day? Or would you rather get paid to wait?
And besides, the effect of waiting to get paid with dividends has been one of the greatest contributor of stock market returns. See the image below.
The image above tells a compelling story about two investments. You can invest in two ways, focus on capital gains or both. The orange line tells the return of your investment if you focus mainly on capital gains and ignore the dividends. The blue line is the returns of an investment that both compounds using capital gains and dividends. As you can see, its almost double that of the capital gains only investment.
How to Pick Dividend Stocks
Now that I convinced you that investing for the long term (with dividends) is the best way to invest your money. I’m going to teach you how you pick the right kind of dividend paying stocks. Though this is only a summarized, rule or thumb kind of investing, it is enough for most people as a guideline. But if you want to learn a more detailed version of this strategy, you can head over to Investing Philippines and take the VIP course.
The dividend yield is the percentage amount of cash you will receive based on your money that is invested. It is expressed in percentage terms much like an interest rate on a bond or a loan. For example, a stock has a 10% dividend yield. It means, if you put 100,000 into that company, you will receive 10% of that as dividends. You will receive 10,000 in passive income per year. If you take into account the tax on dividend income of 10%, you will receive 9,000 per month in passive income per year, for life, for as long as the company is alive.
That’s not all, as time passes, the company may improve and increase its dividends. When the dividends increase, the stock price increase and the benefit of capital gains will come to you as well. Its the fastest way to compounding.
So how do we get the dividend yield of a company?
Its easy, just add all the dividends per share that a company distributes to its shareholders per year, and divide it by the current stock price.
For example, Globe Telecom gives out 27 pesos per share of dividends to their shareholders every quarter. Meaning, they give out 27 x 4 dividends per year. Which means 108 pesos per share every year. As of this writing, the stock price of Globe is 1,930 per share. If we are to compute for the dividend yield of Globe it would be:
108 / 1,930 = 0.056
0.056 or 5.6% yield.
Meaning if you invest 100,000 into Globe, you will expect to receive 5.6% of that or 5,600 without tax.
What’s a good dividend yield?
Now that you know how to get the dividend yield of a company. What dividend yield is good? A good rule of thumb is to have a dividend yield that is the same or above the inflation rate. So if today, the inflation rate is 4%, a dividend yield of 4 and above is a good one. Why? Because you still preserve and even improve the purchasing power of your money if you invest above inflation rate.
Wouldn’t it be more amazing if the passive income you receive each year, also increases on its own while you are doing nothing? And on top of that, you add more to that investment so it grows faster some more?
Welcome to dividend growth.
Companies grow. And with that growth they also increase their profits. And those excess profits can translate to more dividends in the future. Which means more passive income to the investor.
It is the beauty of dividend investing that you get to have a salary increase without doing anything. And that is why there is a double amount in the difference of investment returns between dividend investing vs capital gains only investing. You are making compound interest your friend.
Going back from our example, we know that Globe gives out dividends. The next question that we want to ask is does it increase?
As you can see on the image above, the dividends of Globe Telecom has been increasing. Although its a slow growth, it is still growing. And with these 2 criteria, I would say that it’s safe to put your money in.
If you want to learn more about this kind of investing, please visit Investing Philippines VIP Course.
Back to your Freedom Number
We have come full circle again. After all the things that you have read in this article, I guess you already know what’s the next question. The next question now is, how much dividends do you need to be financially free? If all your investments will be the stock of Globe Telecom, it might be a risky investment. And it might be best to diversify and find more dividend paying stocks that meets our criteria. But its now easier to know how much you need to be financially free, right?
You already know how much dividends you will receive if you invest in a stock. And there is now a goal, an end goal in sight that you can focus on and achieve.
If 1 share of Globe costs you 1930 per share in investment. And each share of Globe gives you 108 pesos each year, how many shares do you need to retire or become financially free? It becomes a simple math problem right?
Let’s say you need 20,000 passive income to spend on living expenses and become financially free, how many Globe shares do you need?
20,000 x 12 because we want the whole year of expenses, becomes 240,000 per year in expenses.
Globe has 5.6% dividend yield so we divide 240,000 with 5.6% which is P4.285 million.
You will need 4.285 million pesos of investment in Globe to be financially free. And that would translate to 2,220 shares of Globe.
Of course, I’m not saying just to only buy Globe, there are other stocks out there that might fit in our criteria. I will leave that homework to you.
To some, 4 million is a big number to just only be earning 20,000 per month. But as you accumulate those shares through the years, you will encounter that the price of stocks will come down or go up. With crashes and prosperity, with boom and busts periods, it presents us opportunities to rack up more shares and the amount of investment may decrease while still getting the same benefit.
That is why stock investing is a long term game.
Imagine all the money you spent on unnecessary things in your life since you first had money, that should have been spent in passive income. How much passive income you should have have now, if you only invested those money? 4 million is an achievable amount is it?
The thing to remember is that, we all have a different FU Money. And it will ultimately depend on the expenses you incur. The less expense the more you can save. The more you can save, the faster you will achieve financial freedom.
I think I have told you everything that you need to know to get started. Investing in dividends alone will provide you with the necessary tools to get out of the rat race or achieve financial freedom. I’m a living proof of that and this is how I did it, all laid out to you. Of course, I know that everyone is different and these things might not work on you or your personality does not allow you to follow the steps above. But if it does and it helped you, I’m glad and satisfied.
Dividend investing might be simple. But it gets the job done. As Charlie Munger said:
“Take a simple idea, and take it seriously” – Charlie Munger
It doesn’t stop here. You can invest in the International Stock Markets using the same investing principles. Its the same simple idea, taken seriously that is working anywhere.
If you’re interested to know more about this kind of investing, kindly visit Investing Philippines.
As always, thank you for the learning🙌
You are welcome Mikk.
Can you please teach me how to compute for the rental yield?
rent per year divided by price of the property.
Thank you very much Teacher Wayne. 🙂
For me, the most difficult part of investing for the long term is the discipline to consistently add to your investment. A person has to have patience and focus to achieve his/her financial freedom.